______/36
Name
Date
Period
Econ Unit 2: Demand Elasticity Problem Set
Definition of Elasticity of Demand: It is a measure of how responsive quantity is to a price change. The larger the
number, then the more responsive consumers will be to a change in price (they will buy more). The smaller the number
then the less responsive consumers will be to a change in price (they will continue to buy that product, just less of it).
1.
2.
3.
An Elasticity of 1.0 or greater =
An Elasticity of EXACTLY 1 =
An Elasticity of between 0 and 1.0 =
demand
demand
demand
Use the Elasticity formula to calculate values of Price Elasticity for all the situations below:
The formula used to calculate the percentage of change in quantity demanded is:
𝑄1 − 𝑄2
𝑋 100 = % 𝑖𝑛 𝑞𝑢𝑎𝑛𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑄1
The formula used to calculate the percentage of change in price is:
𝑃1 − 𝑃2
𝑋 100 = % 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝑃1
The formula for type of Elasticity of Demand is:
% 𝑜𝑓 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄
= 𝑡𝑦𝑝𝑒 𝑜𝑓 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑
% 𝑜𝑓 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
*Please note that if any of these numbers are negative, economists ignore the – sign at look at the number as a positive
Use the formulas above to answer the questions below:
Price
P1
25
40
200
50
Quantity
P2
30
70
220
75
Q1
100
120
80
150
Q2
40
90
64
135
% change in
quantity
demanded
--
10. What happens to the Elasticity of Demand if there are:
a.
Many substitutes for a good? Explain.
b.
Few substitutes for a good? Explain
11. Why is understanding the Elasticity of Demand important to us?
% change in
price
--
Price Elasticity
of Demand and
Type
-5.
6.
7.
8.
5
7
6
8
Elasticity of Demand
Total Revenue Test (TRT)
One way to determine the elasticity of demand for a product is to check on what happens to total revenue in response to
a change in price. Used mostly for small businesses and their price setting in relation to customer demand.
Price x Quantity Demanded= Total Revenue
Elastic Demand
Inelastic Demand
Price↑, Total Revenue↓
Price↓, Total Revenue↑
Price↑, Total Revenue↑
Price↓, Total Revenue↓
1. Prices Rise from $5 to $6. Quantity demanded decrease from 15 to 10.
a. Old Price ________ x Quantity ________ = _______ old total revenue
b. New Price ________ x Quantity ________=________new total revenue
c. Price ↑ ↓ TR ↑ ↓ =______________________ Demand
2. Price falls from $10 to $9. Quantity demanded increase from 100 to 110.
a. Old Price ________ x Quantity ________ = _______ old total revenue
b. New Price ________ x Quantity ________=________new total revenue
c. Price ↑ ↓ TR ↑ ↓ =______________________ Demand
3. Price rises from $6 to $9. Quantity demanded decreases from 60 to 50.
a. Old Price ________ x Quantity ________ = _______ old total revenue
b. New Price ________ x Quantity ________=________new total revenue
c. Price ↑ ↓ TR ↑ ↓ =______________________ Demand
4. Price falls from $6.50 to $6. Quantity demanded increases from 100 to 200
a. Old Price ________ x Quantity ________ = _______ old total revenue
b. New Price ________ x Quantity ________=________new total revenue
c. Price ↑ ↓ TR ↑ ↓ =______________________ Demand
Word Problems
-Use elasticity formulas not TRT1.
Yesterday, the price of strawberries was $3 a box, and Gianna was willing to buy 10 boxes. Today, the price has gone up to
$3.75 a box, and Gianna is now willing to buy 8 boxes. Is Gianna's demand for strawberries elastic or inelastic? What is
Gianna's elasticity of demand?
2.
Kitty advertises to sell donuts for $4 a dozen. She sells 50 dozen, and decides that she can charge more. She raises the price to
$6 a dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the elasticity of demand is constant, how many
would she sell if the price were $10 a box?
3.
A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is the income elasticity of
demand and is the good a normal good or an inferior good? Be able to explain your answer.
4.
John owns the Root Beer Store. He charges $10 per gallon for his top of the line root beer; Hope Floats. You, the economist,
have calculated the elasticity of demand for root beer in his town to be 2.5. If John wants to increase his total revenue, what
advice will you give him and why? Be able to explain your answer.
5.
If the price of a good increases by 8% and the quantity demanded decreases by 12%, what is the price elasticity of demand? Is it
elastic, inelastic or unitary elastic?
6.
Discount stores sell relatively elastic goods. Ceteris paribus (all other things being equal), explain why selling at a relatively
low price is profitable for them.